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May 11, 2012

Markets Could Crash ‘Like in ’87,’ Faber Says

Without ‘massive QE3,’ U.S. market momentum could lose support and deteriorate, the investment guru predicts

A trader on the floor of the New York Mercantile Exchange. (Photo: AP)

There is a risk that U.S. stocks could drop in the second half of the year “like in 1987” without further quantitative easing, according to the investment guru Marc Faber, who spoke to Bloomberg TV on Thursday.

“I think the market will have difficulties to move up strongly unless we have a massive QE3,” said Faber, who manages $300 million at Marc Faber Ltd. “If it moves and makes a high above 1,422, the second half of the year could witness a crash, like in 1987.”

He says that the overall technical condition of the U.S. markets “is deteriorating rapidly.” The European markets have already turned bearish, he notes.

The S&P 500 moved up about 0.25% to trade at 1,361 midday on Friday. The Dow Jones was up 0.20% at 12,880.

Despite JP Morgan’s (JPM) report of a $2 billion loss, investors reacted to the news that consumer sentiment edged higher in May to its best reading since January 2008.

The preliminary report of the University of Michigan-Thomson Reuters index was 77.8 in May, up from 76.4 in April. Plus, the current economic conditions index jumped to 87.3, another best since January 2008, and up from 82.9 in April.

The Dow plunged 23% on Oct. 19, 1987, in the biggest crash since 1914. On the same day, S&P 500 dropped 20%. That year, the Dow ended up 23% higher, and the S&P improved 2%.

“If the market makes a new high, it will be a new high with very few stocks pushing up and the majority of stocks having already rolled over,” Faber said. “The earnings outlook is not particularly good because most economies in the world are slowing down.”

Faber said that the S&P rallied in 2009, made an orthodox top on May 2, 2011, at 1,370, and then a new high of 1,419 on April 2. “The new high was not confirmed by the majority shares … and every day there are some shares that are breaking down ...,” said Faber, whose prediction of a February selloff in global equities never occurred.

“I think we may have seen the high of the year unless you get a huge—a huge—QE3, and that may not be forthcoming,” said the investment expert, noting slower growth at many U.S. firms, especially those tied to sales and earnings in Europe.